Mass. Set to Repeal IT Services Tax Called ‘Most Burdensome’ in U.S.

Massachusetts lawmakers have agreed to repeal a six-week-old tax on computer services that generated such outrage that even the governor who proposed the tax in January now opposes it.

The 6.25 percent sales tax on “computer system design services” was proposed by Gov. Deval Patrick in January, but got little notice before it was slipped in mid-July into a $500 million supplementary funding bill meant to pay for improvements in the state’s public transportation system.

It was passed by the legislature with almost no debate, was signed into law by the governor with little public outrage, and went into effect – theoretically – July 31.

Confusion over what qualifies as a “computer system design service” and how to actually implement the tax – which was supposed to generate $161 million in revenue for the state – has been such a challenge to implement that the state has yet to collect a dime. The main logistical problem is figuring out what is covered and what isn’t: data access, data processing and “information services,” for example, are not taxed, which exempts most hosting, cloud, outsourcing and remote-access monitoring or security services.

Designing and building a Web site from scratch would not be covered, while modifying an original design and selling it to a second customer would be covered. Sale of an application installed at a customer site for the first time would be covered as a product sale. If the company buying the software operated in more than one state, it would be required to figure out what percentage of total usage took place in Massachusetts and certify that it paid taxes on that portion.

The Massachusetts tech economy is the sixth-largest of any state in the country, employs more than 9 percent of the state’s total private-sector workforce and pays them an average of $116,000 per year – second highest pay of any concentration of tech workers in the nation, according to TechAmerica’s report CyberStates 2013.

The burden imposed by the tax threatens to drive IT businesses away, damaging their businesses and the economy of the state, but delivers far less in benefit to the public than it would cost in disrupting a rich and energetic industry, according to a letter to the Massachusetts General Court opposing the tax by Kevin Callahan, director of state government affairs for TechAmerica.

The “tech tax” is “the most burdensome” in the U.S. and could cost Massachusetts companies $500 million per year while damaging the state’s ability to continue to compete in high tech, warned the Massachusetts Taxpayers Foundation.

“Placing the highest tax burden in the country on innovation and technology – the state’s greatest economic strength – is simply bad policy,” according to Michael Widmer, Mass. Taxpayer Foundation president in a statement issued Sept. 9.

Mass. Gov. Deval Patrick, who proposed the tax in January and has been meeting with legislators who complain their constituents hate the new tax, reversed his position Sept. 11. “It’s time for it to go,” Patrick said in an interview with the Boston Globe. “I’m persuaded that the impact to our reputation is too problematic. We’ve worked really, really hard to establish ourselves as an innovation hub in the world and we ought not do anything that compromises that.”

Republican legislators had introduced a bill to repeal the tax, but were unable to do much with it in the Democratic-controlled Massachusetts legislature.

Democratic leaders announced Sept. 12 they would support repeal of the tax, which could be completed within weeks.

“It is now evident that the impact of the tax is broader than any of us ever anticipated or intended,” according to Mass. Senate President Therese Murray at a press conference Sept. 12.